3 7 Deadly Sins of Waste in Supply Chain Management: How VMI Can Help Lean manufacturing is a management philosophy modeled after Japanese automotive manufacturer, Toyota, and the Toyota Production System (TPS). The TPS was designed to allow for agility in manufacturing by reducing lead times and focusing on the customer s needs for timely, affordable and high quality products. By focusing on actions within the organization s processes Toyota established 3 categories: Value-Added: Activities that change the product/service toward something the customer wants and would be willing to pay for without incurring any errors or waste in the process. Non-Value Added, but Required: Activities required by law or contract fall into this category as do activities needed to keep the company running (i.e. maintenance, recruitment, inspections, etc.) Non-Value Added: Activities considered to be pure waste use resources but don t create value. (i.e. wait times, walk times, rework, etc.) For the purpose of this ebook, we will take a look at pure wastes (structured into 7 deadly sins of waste) and how VMI Services can help supply chain management efforts related to the procurement of fasteners and class C production components. 3

4 Sin #1 - Transport & Handling WASTE DEFINED AS: Material movement that is not directly associated with a value adding process. This can be movement of materials from suppliers to inventory, to production line and every step involved in the process. (poor layout of material, large batch sizes, multiple storage locations, poor packaging, distance between storage location and final usage location.) 4

5 How VMI Services Reduce Transport & Handling Waste Depending on the VMI program implemented, a supplier can offer significant reduction in transport and handling waste. This is especially true for low-dollar production components (or Class C production components) like fasteners. Often, these small parts make up a large portion of an OEM s SKUs and are purchased from a number of suppliers. By moving these items to a single distributor within a VMI program, the distributor becomes the control point for the rest of the supply chain (in both directions). For example, they may be able to find sources who can manufacture multiple parts to be shipped together to their warehouse from the supply side. Or, before the OEM customer ever receives their first shipment, they can reduce transport and handling waste by: 1. Breaking bulk 2. Providing kitting services 3. Providing subassembly services 4. Shipping numerous replenishment items together from their warehouse On the customer-facing side, a distributor can reduce transport and handling waste by: 1. Providing initial inventory set-up to improve or reduce: A. Quantity of parts kept on hand (less is more!) B. Proximity of inventory to point of use C. Setting up working inventory at point of use with a visual cue for replenishment. (called Kanban) 5

6 2. Delivering parts on a daily, bi-weekly, weekly, etc. basis to a: A. receiving area [least significant impact] B. central stock location (or locations) within a manufacturing facility [more significant impact] or, 3. Providing an onsite employee and in-plant store to receive, stock, and replenish inventory at the point of use on a regular schedule. [most significant impact] Any of these VMI Services can, in some way, impact and improve transport and handling waste. The benefit of a VMI program is to offset the OEM s internal investment and resource allocation to tasks that detract from what Toyota defined as a value-added activity. By outsourcing the ordering, receiving, stocking and replenishment functions to a credible and reliable distributor, an OEM can ensure that their internal labor efforts are more aligned with the actions needed to bring value to their customer. Some may argue that an onsite solution simply passes the waste to the vendor. However, many VMI service providers will, themselves, use lean practices to refine their processes and establish the most efficient methods through continuous improvement efforts / kaizen events both internally and at the customer location. kai zen ˈkīzən/ noun Japanese term for a gradual approach to ever higher standards in quality enhancement and waste reduction, through small but continual improvements involving everyone from the chief executive to the lowest level workers. 6

7 Sin #2 - Inventory WASTE DEFINED AS: Having too many of the wrong parts or items in stock, not enough of what is needed, too much work in progress or unfinished goods. 7

8 How VMI Services Reduce Inventory Waste One of the most significant benefits of vendor managed inventory services is to provide the OEM s production floor with the right parts in the right place at the right time and in the right quantity needed. It sounds simple enough, but when dealing with low-cost, high-volume C class parts, an OEM has to consider that these parts typically account for the highest number of SKU s and can be extremely difficult and costly to manage internally. How does it work? An effective VMI program incorporates a pull system: parts are only replenished after use and typically run on a 2-bin kanban system to allow time for replenishment to arrive before the 2nd bin is depleted. The VMI provider and the customer/user work together to make sure there is a consistent flow of inventory. Ongoing communications minimize over-stocking, shortages and product obsolescence. kan ban ˈkänbän/ noun A visual signal that's used to trigger an action. The word kanban is Japanese. Roughly translated, it means card you can see. Toyota introduced and refined the use of kanban in a relay system to standardize the flow of parts in their production lines in the 1950s. Action Visual Signal 8

10 How VMI Services Reduce Movement Waste The most effective VMI programs provide dock to stock delivery of components by the distributor as close to the point of use as possible. An onsite program or a bi-weekly/ weekly replenishment cycle can keep a busy production floor running smoothly. If an OEM doesn t already have working bins established at the point of use, a VMI partner would very likely suggest this solution for high-use work stations, minimizing movement waste. VMI significantly reduces the number of activities by the OEMs staff to receive, inspect, put into inventory, and pull when needed for production. However, even with a more basic VMI program, the OEM reduces or eliminates some of these areas of waste depending upon how the customer chooses to have their parts ordered, received, stocked and replenished. Dock to Stock A VMI provider can deliver replenishment stock to a central stocking location, multiple stocking locations or directly to the point of use on the manufacturing floor. 10

11 Sin #4 Waiting Time WASTE DEFINED AS: People or things waiting around for the next action. Production down time, lengthy processing times, long lead times, approval processes 11

12 How VMI Services Reduce Waiting Time Waste Simply stated, the product is at the point of use in sufficient quantity to meet production requirements. The VMI service provider is working behind the scenes with their suppliers to ensure the customer has an adequate supply of inventory and that there is no interruption of production due to stock-outs or delays in lead time. This is especially valuable for custom parts that run on longer lead times. There is no need to chase parts in the plant or with the supplier. Freight/expedite costs are covered by the VMI service provider (since expedites, in theory, should diminish over time). Plant personnel can focus on meeting customer delivery requirements Purchasing personnel can focus on the top 20% of their purchases that are 80% of their overall spend The Pareto Principle (The 80/20 rule) Vilfredo Pareto 1906 The 80/20 Rule means that in anything, a few (20 percent) are vital, and many (80 percent) are trivial. The value of the Pareto Principle for a manager is that it reminds you to focus on the 20 percent that matters. 12

14 How VMI Services Reduce Overproduction Waste VMI can only work for the components that are part of the program. For example, if an OEM s production model is to build up safety stock for anticipated sales growth or to keep their production floor running and employees working well, a VMI partner isn t going to dictate or redefine those decisions. What it will do is guarantee the quantity of stock available to keep up with usage as agreed to by the customer and supplier. Once this is agreement is understood, stock is only replenished upon use. Production needs change, which is why communication is key to a successful VMI program. VMI is an ideal way for an OEM to remain nimble while mitigating risk in their supply chain. The time that Purchasing gains with VMI services can be used to operate on a more strategic basis, opening more dialogue with sales and marketing on any anticipated contract wins or marketing promotions, etc. that could impact production. The more insight gained within the organization, the more effective and responsive production can become ensuring higher customer satisfaction as it relates to on-time delivery. Dedicated Account Management A dedicated account manager can learn the nuances of an OEM customer s operations and act as a single point of contact to minimize communication issues. In addition, at Falcon, our AM s handle sourcing, quoting, and inventory management allowing them to make fast, informed decisions. 14

16 How VMI Services Reduce Over-Processing Waste The most obvious way that VMI Services reduce over-processing waste is through vendor consolidation. Consider the time and energy Purchasing spends on: sending parts out to quote qualifying and choosing a new vendor going through the sample approval and quality control process reordering or following up on the whereabouts of the part(s) making payment on invoices Now, multiply this by the typically large number of SKU s for all the class C components needed throughout a manufacturing plant and the variety of different suppliers currently needed to fulfill each of those orders! A VMI partner takes all of those nuisance items from Purchasing s list, providing them with one, comprehensive invoice that breaks out all the necessary monthly purchases in one place. This allows Purchasing to focus on the higher-cost (A and B) production parts whose cost reduction would have a more significant impact for their organization while still saving money on the overall cost of the class C items. The Cost of Generating a PO $$ The cost of generating a purchase order varies by organization. You'd need to know the salaries of each individual involved in the process; amortize the price paid for systems by the number of purchase orders generated over the life of the systems; know the telecom and/or paper costs; factor in overhead costs, etc. Experts suggest saving time by using a number in the range of $100 - $

17 Sin #7 - Defects WASTE DEFINED AS: Time and effort wasted producing and correcting broken, incorrect or defective products or actions. This can range from typos in documentation to faulty parts in production components. 17

18 How VMI Services Reduce Defect Waste A reputable VMI provider has an onsite quality lab and/or a 3rd party accredited lab to test and validate sample parts and first article inspection pieces to consistently meet an OEM s specifications. The VMI also deals with the vendor when the parts don t meet quality requirements, taking another burden off of Purchasing (often before the OEM even knows about the issue, unless it will impact product availability). In addition to this more obvious impact on defect waste, a VMI partner can help reduce or eliminate defects such as typos in purchase orders by implementing a barcode/scanning system for generating reorders or by integrating directly with an OEM s existing ordering system. Look for: ISO 9001:2008 Businesses that seek ISO 9001:2008 certification need to demonstrate that they can not only deliver reliable customer service and products, but also that they are actively reevaluating their current processes and policies to find ways to improve their operations by conducting regular internal audits to monitor the execution of policies and procedures. 18

19 VMI Urban Legend: Premium Price... Just as an OEM is skilled at producing a certain product or good, distributors are skilled at sourcing. They use their established relationships, their buying power and their knowledge of the marketplace to find the best mix of speed, quality and price for their customer. The distributor/ VMI service provider will factor in the transportation cost to themselves in your final price as well as an amount to cover their internal labor and finally, their profit. In some cases, especially if they carry multiple parts for an OEM, they can offer prices lower than the OEM could acquire direct. However, what is not a part of the quoted cost (and where the exponential return on investment comes in to play for the OEM) is: 1. Reduction in carrying cost 2. Internal time savings 3. Avoided freight and expedite costs 4. Lead time reduction 5. Reduced down-time 6. Internal space reduction/savings 7. Improved order accuracy 8. Elimination of overspend/overstock All of these elements factor into the Total Cost of Ownership, (or TCO) and contribute to waste that the VMI provider can reduce or eliminate for the OEM. Global Supply Alliance The GSA is a group of distributors whose mission is to work together to achieve the lowest landed cost, expand product offering, and improve worldwide market position. Falcon has been a proud member of the GSA since

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